EPFO May Slightly Reduce PF Interest Rate To 8-8.2% For FY 2025-26: Calculation And Tax Rules Explained

Last year, the Employees' Provident Fund Organisation (EPFO) declared an interest rate of 8.25 per cent per annum for FY 2025-26. This rate applies to provident fund contributions made between April 1, 2024, and March 31, 2026. However, media reports this year suggest that the EPFO may slightly lower the interest rate for 2025-26, with estimates ranging between 8 per cent and 8.20 per cent.

Notably, the final interest rate will be decided by the EPFO's Central Board of Trustees and will require formal approval before being notified. Until an official announcement is made, the projected rate remains indicative and not confirmed.

How EPF Interest Is Calculated?

Interest on EPF contributions is calculated on a monthly basis but is credited to members' accounts only at the end of the financial year, on March 31. As a result, the total interest earned during the year reflects the cumulative monthly calculations.

If the annual interest rate is 8.25 per cent, the effective monthly rate works out to approximately 0.688 per cent (8.25 per cent divided by 12 months).

An employee contributes 12 per cent of basic salary plus dearness allowance (DA) to the EPF. The employer also contributes 12 per cent, which is split into two components. Of this, 8.33 per cent goes towards the Employees' Pension Scheme (EPS), subject to a maximum of Rs 1,250 per month, while the remaining 3.67 per cent is credited to the EPF account.

For instance, if an employee's basic salary and DA total Rs 50,000 per month:

• Employee's EPF contribution (12 per cent of Rs 50,000): Rs 6,000
• Employer's contribution to EPS (8.33 per cent of Rs 15,000): Rs 1,250
• Employer's contribution to EPF (Rs 6,000 - Rs 1,250): Rs 4,750

This brings the total monthly EPF contribution to Rs 10,750 (Rs 6,000 + Rs 4,750).
In the first month of employment, no interest is earned, as interest is calculated on the closing balance. At the end of the first month, the EPF balance stands at Rs 10,750. In the second month, another Rs 10,750 is added, taking the total balance to Rs 21,500. Interest for the second month is calculated at 0.688 per cent, amounting to approximately Rs 147.92. This process continues for each subsequent month.

By the end of the financial year, the total EPF balance consists of the employee's contributions, the employer's contributions to EPF, and the interest accumulated month by month.

Based on a projected interest rate of around 8.2 per cent, the subscribers are expected to earn a lower interest this year compared to last year. However, the upcoming elections could influence the final decision, probably leading to a decision to keep the interest rates unchanged.

Taxation Of EPF Interest

Interest earned on an employee's EPF contributions exceeding Rs 2.5 lakh in a financial year is taxable and subject to tax deducted at source (TDS). However, interest accrued on contributions up to Rs 2.5 lakh remains tax-free. Additionally, employees can claim deductions of up to Rs 1.5 lakh on EPF contributions under Section 80C of the Income Tax Act, 1961, making EPF a tax-efficient long-term savings option.